On inverse relationship between farm size and productivity

Around 67 per cent of total operational land holdings in India are owned by marginal farmers, with an average size of 0.39 hectares. Though the average size of land holdings for marginal farmers have remained unchanged between 2000-01 and 2010-11, the area under marginal holdings have increased from 18.7 per cent to 22.5 per cent. According to Agricultural Census definition, marginal farms are those with less than 1 hectare of land. Small and semi-medium farms are those with size of 1-2 and 2-4 hectares respectively. Medium farms have a size of 4-10 hectares. Those with more than 10 hectares are termed as large farms. The average size of large farms has increased marginally from 17.12 hectares in 2000-01 to around 17.38 hectares in 2010-11. In an article in Economic and Political Weekly in 2011, Ramesh Chand, P. A. Lakshmi Prasanna and Aruna Singh, then all at National Centre for Agricultural Economics and Policy Research, have shown that in terms of input use, compared to large holdings, marginal and small farmers makes intensive use of inputs like irrigation, fertilizer, HYV seeds etc.

The recent public discourse on new land policy in India, have rekindled the old debate on land equity both inside and outside the Parliament. In the historical perspective, major land policies introduced during the colonial period were Mahalwari and Ryotwari system. These British policies had nothing to do with ensuring equity in land distribution across households or increasing farm productivity. The underlying objectives of such policies were earning revenue for the treasury. After independence, India adopted the soviet styled planned economy, heralding a new beginning of economic growth and development. Social and equity objective soon seeped into its land policy formulation. The primary motivation for adoption of land reforms in the country emanated basically from the purpose of raising farm productivity. A nation just born into the cradle of independence and democracy faced hard challenges for filling sufficiently its food basket. With population growing at a faster rate than agricultural growth, India was on the verge of falling into the Malthusian trap. Taking cue from Japanese experience during the Meiji revolution, policy makers in India at that time came to the conclusion that in order to achieve higher farm productivity, land reform is a prerequisite. This leads to the perennial debate lying right at the heart of development economics: whether a small ‘size’ farm is more productive than large ‘size’ farm? That is in a broader sense, whether an inverse relationship exists between farm size and productivity.

Historical perspectives have not been able to see through the same lenses. The Soviet era agricultural economist Alexander Chayanov, conformed to the idea that smaller farm tends to be inefficient. The argument is that smaller farms are synonymous with subsistence farming. Since the sole objective for a subsistence farmer is survival, any expectation of surplus production would be an exaggeration. In the Indian context, the first die was cast by Amartya Sen, who in a piece written in the then The Economic Weekly in 1964, argued observing from Farm Management Surveys, that in general, a negative relationship between farm size and yield permeates in Indian agriculture. He finds that large farms suffer from ‘diseconomies’ of scale. With surplus labor, smaller farms could intensively allocate labor resource leading to higher yield. In a recent study published in Oxford Development Studies in 2015 by Sarthak Gaurav, then at London School of Economics and Political Science and Srijit Mishra at Indira Gandhi Institute of Development Research corroborates these observations made by Sen with data as recent as 2002-03.

Such empirically derived generalization of a phenomenon attracted repudiation from some quarters who held the view other way round. Leading agricultural economists of that time like C. H. Hanumantha Rao and Ashok Rudra, in their separate studies find that smaller farms are constrained by modern technologies, credit etc. which restricts their productive capacity. On the other hand, farmers with large holdings have access to machines, tractors, irrigation etc., which make them more productive. Yet there are certain participants in this debate, who confide that the existence of farm size–productivity inverse relationship may be contextually correct. The theory of inverse relationship may be applicable in underdeveloped economies. But, such relationship ceases to exist in developed economies. Hence, a generalization of such a relationship into a ‘theory’ may be farfetched. Various other observations and propositions have gradually emerged as the debate has evolved over the years.

If we start following this debate then it develops as a never ending ‘cat and mouse’ game – with each side throwing in a bucket of new empirical evidences to buttress their claim. It boils down to ‘my example versus yours’ imbroglio. But, what lays buried within this trampling of each other’s arguments is the definition of ‘size’: what defines a ‘small sized’ farm? Both NSS and Agricultural Census make arbitrary discrete breakdown of land size definition. Say, for example a marginal holding is one which has less than 1 hectare of operational land. What if the land holding is 1.1 hectare? Definition wise it becomes a small holding. The broader question that emerges whether an exogenously sharp discrete cut offs can be put to identify smaller holdings from the large ones. In reality it is difficult to find the inflexion point when a holding changes its nature from a small to become a large holding. If conundrum on what constitutes a ‘small’ farm cannot be settled first, then the inverse relationship debate fails to begin.

Productivity change in general has got two arms: efficiency gain and technological gain. It emerges that lower farm size may lead to adopt intensive labor use. This is efficiency gain. Whereas, large holdings could apply modern technologies like tractors, machine harvesters etc. This kind of productivity gain is technological gain. For a comprehensive economic gain and progress both efficiency and technological gains are essential. It is difficult to justify whether the argument for efficiency gain (through small farm sizes) merits more importance than technological change (identified with large farm size).

The basic argument put forward by the proponents of the inverse relationship is that labor use would be intensive in a small sized farm. But, in reality it would depend on whether the farmer is net seller or a net buyer of wage goods. Small farmers are usually poorly endowed. They hang on to their small plot of land and puts in labor effort just in order to survive. Also, Alexander Chayanov pointed out that labor effort depends on the size of non-working members of the farm household. More such members, larger will be the effort. Hence, the claim that smaller farms would automatically imply higher labor effort does not hold much water.

Another important observation that emerges from the debate is as to what should be the measuring yardstick. Yield is often used to make an estimate about productivity. In doing so, sometimes there is a deviation of attention from value of the output produced. Usually the words yield and productivity are being used interchangeably in the literature. However, yield is a partial equilibrium concept since it is bereft of price information. It would have a general equilibrium argument only if value of output is used as the yardstick. Hence, the entire debate on inverse relationship between farm size and productivity is a partial understanding of the phenomenon.

The objective of a subsistence farmer with marginal land holdings is to maximize output since his existence depends on it. On the other hand, a large farmer’s objective is to maximize profits. To generalize an inverse relationship phenomenon by comparing both the types of farm is like barking up the wrong tree. The objective functions of the two farm sizes are incompatible- one is for survival, while the other is for making a profit. Hence, comparing the two would be like comparing a public sector enterprise with that of a private sector firm.

Lastly, economists have also pointed out that a higher yield may be enjoyed only till the point when family labor is fully exhausted. Beyond that excess labor sets out seeking off farm employment. Hence, inverse farm size and productivity is short run phenomenon, not sustainable in the long run. In the long run, it is not only size that matter. A social, political as well as cultural context needs to be considered alongside, as all these are always embedded in economics.